The behaviour of the UK banking sector becomes more outrageous by the day. Taxpayer money has been thrown at the banks for one simple reason � to get them lending again to businesses and individuals for the public good.
The behaviour of the UK banking sector becomes more outrageous by the day. Taxpayer money has been thrown at the banks for one simple reason - to get them lending again to businesses and individuals for the public good. The longer their credit-crunch-induced lending phobia continues, the bigger the economic bill racked up.
The Treasury is shelling out tens of billions of pounds to take stakes in Royal Bank of Scotland and the merged Lloyds TSB-HBOS, and is supporting the wider UK banking sector by offering to guarantee institutions' own borrowing to the tune of hundreds of billions of pounds.
Meanwhile, the Bank of England has slashed UK base rates from 5% in early October to just 2%. A further big cut is a racing certainty tomorrow - taking base rates lower than they have been at any time since the Bank of England was created in 1694.
And how has the UK banking sector responded to this unprecedented bail-out by the public sector?
It has continued to cut the availability of credit, and intends to reduce it further. This behaviour, highlighted when the Bank of England's latest credit conditions survey was published last Friday, appears to be based on some belatedly-found notion of prudence.
Meanwhile, the banks have hiked arrangement fees on loans. And, just for good measure, they have been raising the interest-rate margins charged on people's mortgages and on loans to businesses.
Hardly a demonstration of gratitude to the UK's individual and corporate taxpayers, who have every right to feel aggrieved.
Peter Hughes, chief executive of industry body Scottish Engineering, told The Herald this week that UK government ministers "have got to get an armlock on the banks".
Hughes suggested appointing a government representative to the board to order the banks what to do.
The Federation of Small Businesses noted the banks' "warm words are not being translated into action on the high streets" in terms of commitments by some of the banks to maintain lending at 2007 levels in return for government help.
Such commitments regarding behaviour are notoriously difficult to enforce. In another context, this is why the UK competition authorities often force divestment of assets in mergers or takeovers, or block proposed deals outright, rather than go down the behavioural route.
Changes in behaviour occur only when parties abide by the spirit of something, given the impossibility of producing rules which are detailed enough to ensure the desired conduct but flexible enough to avoid bureaucratic hassle does not block the intended benefit.
And, while many businesses and individuals will agree with Hughes' sentiments, it is difficult to see how the banks can be forced to do what the taxpayer deserves in return for the hundreds of billions of pounds of public money committed to bailing out the UK banking sector.
Self-interest is no doubt the driving force of the UK banking sector's current behaviour. The drive in years gone by to expand lending at a much greater rate than overall economic growth was also driven by self-interest, on the part of those bonus-earning individuals within the banks and the institutions themselves.
However, what the banks do not seem to be grasping now is that lending on fair terms and in reasonable quantities to businesses and individuals is in their own long-term interests.
Unless some kind of normality returns to bank lending to businesses, unemployment will soar by more than is necessary as firms are forced to retrench or even go to the wall. Higher unemployment will trigger greater bad debts for the banks as people become unable to meet repayments on mortgages or other loans. This will erode banks' capital and make them even more reluctant to lend.
This vicious circle will, in large part, be of the banks' own making. And banks' apparent obsession with short-term self-preservation will, if it persists, look more like collective hara-kiri in a few months' time.
The banking bosses might argue shareholder interest as they fret over the economic outlook and refuse to lend more reasonably. But shareholders in some of the banks might not have much of an interest left if further big capital injections are required. Long-suffering taxpayers, whose ranks include the very businesspeople who need banks to lend, are now prominent among the sector's shareholders.
The anecdotal evidence suggests the cut-back in lending has been relatively indiscriminate.
There are too many stories of even the most compliant of business customers facing a detrimental change in loan terms by their banks. And these businesses are not just facing higher interest rates at a time when base rates are tumbling. They are also having to pay for the privilege of higher interest rates through sometimes brutal rearrangement fees.
Such behaviour is indefensible.
In the mortgage market, many of the trackers are no longer track-ing as base rates plunge. Colossal deposits are now required, when not so long ago banks were offer-ing loan-to-value ratios in excess of 100% and big multiples of salary. The current stance will freeze out most first-time buyers and ensure a continuation of the recent heavy falls in house prices - putting upward pressure on banks' bad debt charges.
The Bank of England's huge base rate cuts look to be benefiting the banks. Interbank lending rates have tumbled, so banks' citation of the cost of wholesale funding in justifying treatment of customers looks like an increasingly hollow argument.
The banks might also argue they need to rebuild balance sheets (restoring the damage sustained by their own mistakes). However, there has to be a degree of restraint in such rebuilding for the benefit of banks and their customers alike.
If anyone needed yet more evidence of the devastating impact of the credit drought on the UK economy it came yesterday in the form of the Chartered Institute of Purchasing and Supply's latest survey of the dominant service sector.
Service companies shed staff in December at the fastest pace since this survey began in 1996. Service sector activity is falling at a rate only marginally lower than the record pace of decline in November.
Economists now fear UK gross domestic product fell by about 1% in the fourth quarter, having dropped 0.6% in the three months to September.
With GDP tumbling at this rate, you can be sure unemployment will be soaring in coming months.
Bank of England Governor Mervyn King's warning in November of more widespread nationalisation of the UK banking sector - if lending does not return to more normal levels - is no idle threat in this environment. Rather it is eminently conceivable, if the banks continue to behave in a way which causes unnecessary damage to the economy, pushes unemployment and bad debts higher than they need to go, and results in them needing further capital injections.
However, in this entirely uncharted territory we are now in, one very worrying question is whether more widespread nationalisation of the UK banking sector would make any difference to lending behaviour. And if it would not, what would?
